Why eBay is betting on payments to help its turnaround

EBay Inc. is hoping for a revival of sorts, and it’s betting that a more active role in payments might help spice up the platform.

Payments were once deemed a boring area not worth the time or investment for e-commerce companies, but marketplaces are now taking control of this part of their business as a way to enhance the shopping experience for both buyers and sellers. Shoppers often leave their carts behind if the checkout process takes too long, and small merchants have no shortage of options when it comes to selling items online. EBay
EBAY, +2.04%
executives believe a more simplified payments experience will make the platform more appealing on both sides.

The company is in the early days of a move toward managed payments that will eventually relegate PayPal Holdings Inc.
PYPL, +0.80%
which was spun out of eBay in 2015, to a lesser role on the site. The e-commerce platform is following in the footsteps of online peers Amazon.com Inc.
AMZN, +0.18%
and Etsy Inc.
ETSY, +2.27%
both of which mix payments with the services they offer sellers. EBay expects that overall fees for sellers will come down under the new initiative.

Earlier this fall, eBay began migrating a small portion of its volume from PayPal to its new managed-payments service, which is being done in partnership with European payment-processor Adyen N.V.
ADYEN, +2.90%
Most sellers are seeing a 25% savings on fees when the company is managing everything for them end-to-end, Alyssa Cutright, eBay’s vice president of global payments, told MarketWatch.

When eBay announced the move to manage payments back in January, Chief Executive Devin Wenig said he expected the move would “capture significantly better economics while reducing overall selling costs.”

The goal is for sellers to also be able to handle logistics more seamlessly, with just one contract required for both payments and selling, as well as a single company to contact with any issues. “Often sellers will call with questions on payments and we’ll have to say we don’t have information on that and that they have to contact PayPal,” Cutright said. “It’s hard when you don’t have the whole picture.”

The company also hopes to attract more buyers by accepting a variety of local payment methods, especially when it comes to regions where Visa Inc.
V, +0.89%
and Mastercard Inc.
MA, +1.35%
aren’t as prevalent.

“You go into some markets and you see much more stored-value mobile or carrier-based payment options,” Cutright said. “We want to make sure that if there are buyers that we want to reach in any of these given markets, we allow them to pay in a manner that’s familiar.”

PayPal also sees potential in adding more local payment methods and embarked on a global rollout of its “smart buttons” initiative in September. That technology looks at location and past habits to render relevant payments buttons for a given customer.

EBay’s managed-payments system includes Apple Pay
AAPL, +0.62%
as an additional checkout option, and Cutright said that 1 in 5 iOS shoppers on eBay have chosen to complete their purchases with that mobile wallet when it was listed on the platform

Management sees a $2 billion annual revenue opportunity and the potential for $500 million in incremental operating profit once the transition to managed payments is complete, which is expected to happen by the end of 2021. EBay’s operating agreement with PayPal expires in 2020, and the company is limited in how much volume it can move to the new system until then.

Analysts, too, now see payments as a catalyst that could help eBay’s stalled stock. Lowering costs for sellers is “a clear win,” D.A. Davidson’s Tom Forte told MarketWatch, while letting consumers pay with their preferred payment method instead of incentivizing them to use PayPal should benefit the platform, he reasoned.

The initial transition to managed payments hasn’t come without hitches, however. Some sellers who opted in to the initial rollout have complained on eBay’s community forums that they saw their sales take a hit once they became part of the new system.

Cutright admits that there has been a bit of consumer apprehension about the new payment system. The company has found that some buyers worry that eBay is sharing card details with sellers when PayPal isn’t listed as a checkout option, and the site has tweaked its messaging to clarify that card information remains secure.

Though PayPal won’t run payments for the new eBay system, the e-commerce giant hopes to add the PayPal button as an option at checkout in 2019. Adding PayPal is “our absolute no. 1 priority that we are working on with urgency,” Cutright said.

The bumpy rollout is “a little concerning,” Wedbush analyst Ygal Arounian told MarketWatch, though he said that the transition is a long-term process. By virtue of the operating agreement with PayPal, eBay has to migrate volume to the new system gradually, which should give it time to work out the kinks, he argued.

Advertising is another key element of the eBay turnaround story, according to Arounian. The company is making a bigger push into promoted listings.

EBay shares have fallen 21% so far this year, while the S&P 500
SPX, +1.32%
has gained 2.5%.

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